Teach Your Children the Four Pillars of Money Management

My son is almost a year old, so I am interested in the topic of teaching children about money management. I think teaching them about money can build a solid foundation that will result in a lifetime of financial well being. I have been reading various articles on this subject and here is my spin on it.

The Four Pillars of Money Management

Out of all the things that you can do with money, I think there are four important lessons that you can teach your children.

1. How To Make Money

I think it’s important to teach your children that money simply does not appear out of nowhere. For the most part, making money is the result of trading your time for money — i.e., work. Yes, we talk often about passive income here, but let’s keep the lesson simple. For them, they should know that work equals money.

At the very least they should understand why you go away every morning and come back in the evening. It’s also good to help them understand that you are trading your time for money, as such money is a limited resource. Wouldn’t it be nice if one day your child say to you that he’s willing to give up his allowance so that he could spend more time with you?

The subject of whether or not you should give your children an allowance is debatable. Even more debatable is whether you should let them earn money for doing chores. Some will argue that this is a good thing. Others believe that children are responsible for chores with or without compensation. Personally, I think a small allowance is okay and there are chores that children should do without compensation. However, I also think that we should have tasks that they could perform in exchange for money.

2. How To Spend Money

Now that they know how money is made, they need to be able to make wise financial decision when they are spending it. I think an envelope system where you split money into “save” versus “spend” pile is too limited. I think children need to determine for themselves how to split the money.

I think spending money is a fairly complex topic and we can divide it into phases:

Phase 1 – Spending Based On Limited Resource.

They can spend whatever they earn but no more. If they want more, they’ll have to decide on what they are willing to give up. They’ll have to decide if they really want A or B — but not both.

Phase 2 – Spending Based On Value.

As your child advance, you could teach them about making smart spending decisions. For example:

Spending more for a better-made toy rather than spending less on a cheaply made one.

Spending less by waiting for things to go on sales.

If you have more than one child, teach them how they could each buy a different toy and share.

Phase 3 – Spending Based On Needs And Wants.

As they mature in their spending habits, you could give them more control over their money. For example, give them a budget for a “back to school” shopping trip. As they walk through the store, they will be tempted by things they don’t need. Even for stuff that they do need, they’ll be presented with the options like buying a fancy notebook that costs $15, or a basic but functional one that costs $2. Your job is to help guide them and explain the difference between wants and needs; while it’s their responsibility to get everything on the list without blowing their budget.

I am tempted to add Phase 4 where children can borrow from their future allowances, but based on our national statistics, many parents need to learn this lesson themselves!

3. How To Save Money

It’s inevitable that your children will want to spend more than their weekly allowance at one point or another. This is a great time to teach them how to set financial goals and learn how to save money. For example, if they want a fancy book bag that costs $20, you could teach them how saving $1 a week can get them that bag in 20 weeks, or they can have it in 10 weeks if they manage to save $2 a week.

For a more advanced lesson, you could teach them about earning interest. For example, if they give you $1 a week for 5 weeks, they could earn interest and get back $6 at the end of 5 weeks. In my opinion, traditional bank is too slow to effectively teach children about saving money and earning interest. You’ll have to do some simulation here to help them appreciate the power of saving.

4. How To Give Away Money

Last but not least, children should be taught about charity. The first lesson should be about sharing things that they have with others. Later on, you could slowly expose them to worthy causes and ask if they would be willing to sacrifice a small portion of their allowance to support these causes.

Children are curious and there are plenty of opportunities to explain how things work to them. In these conversations, you could say that they could make a difference by donating some money and see how they react. But what ever you do, don’t force the issue. They need to understand why they are giving their money away, and let them give because they want to.

Advanced Lessons

You’ll notice that the lessons above are basic and meant for younger children. As your children grow up, you should teach them about other money management topics, such as:

Passive versus active income

Investing

Retirement

Saving for College

Credit and debt; particularly how this can destroy their lives

Last but not least, you need to remember that children learn by observing how you do things — even more than by listening to you! So be sure to teach them by example and show them how it should be done. Most importantly don’t teach them one thing and do something different yourself.

About the Author

Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

@Aya — “When I started to get allowance though, my parents thought it was a good way to kick off on getting me to understand that now I had to save up to get things I wanted since it won’t be bought for me anymore.”

I remember the first time I started getting a weekly allowance back in grade school, and it was only because I found out my friends got allowance – until then, I didn’t even think of having money for myself. It could partly be because I am an only child and got a lot of the things I asked for (not always, of course). When I started to get allowance though, my parents thought it was a good way to kick off on getting me to understand that now I had to save up to get things I wanted since it won’t be bought for me anymore. It was a good trade-off, and my parents didn’t have to worry about spoiling me too much anymore. I think kids actually find it fun to save money, partly because there’s probably less temptation for them to spend it on luxury items outside the realm of candy and teddy bears.

To further elaborate (this topic is very dear to me), it’s unfortunate that in our schooling system that personal finance is not more enforced. I do realize that it should start at the home, but most parents that pass on bad money habits to their kids inherited those same habits from their parents. It’s a never ending cycle.

The humorous part in my life is that I received a degree in Finance. I could tell you how the duration on a bond portfolio and spit out modern portfolio theory until I was blue in the face, but the simple lessons of the impact of credit card debt and things to consider when purchasing a home were nonexistent. I’d like to think I got a leg up since I was in Finance and I was constantly surrounded by numbers. But what the others? It really needs to be apart of the the schooling process in some manner.

@Jeff — Thank you for sharing. Yes, it’s scary how some people (not just kids) think that credit card is a magic key that gives them access to whatever they want. And some don’t even realize that they are in a bad situation because they are only looking at the small minimum payment due.

@Donny — I think it would be interesting also to see how different child react to different “lessons”. I think it will tell you a lot about the kind of adult they’ll grow up to be. The nice thing about this is that it gives you time to mold them.

Educated our youth about the value of money is more important today than it has ever been. Everyone should teach their children the value of saving and investing their money at a young age. By doing this will gauge to the learning curve and provide a better future for them and their children.

The last part about “children learn by observing how you do things” is so true. Couple of examples:

1) Several years ago I was waiting in line to check out a major department store. In front of me was a mother and her young daughter (I’m assuming 6-7). When It was time to check out, the mother handed her daughter the store credit card and instructed her to hand it to the cashier. Coming from a family that has been tore apart by credit card debt, that image greatly bothered me.

2) Waiting to check out at a another store (man, I sound pretty frugal, huh?) a father and his son (around 10 assume) was checking out and the son wanted something….a ball, action figure, Red Ryder BB gun (fill in the blank) and the dad said no. The son replied with, “Just swipe it on the credit card!” Wow! That’s the generation that we are dealing with now.

When a child is given the opportunity to earn something, that’s a valuable life lesson that will ultimately become priceless. Appreciate, appreciate, appreciate.

As the child gets older, one lesson that a mother had told me that she had did for her high school daughter and her credit card was great. She had the daughter figure out how long it would take to pay off a $500 credit balance by just making the minimum payment. The daughter was amazed at not only how long, but also how much that $500 dollars had grown due to outrageous rates. That worked wonders!

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